Big Stock Traders Seeking Liquidity in Asia's Dry Year

With Asian equity markets quiet for much of the year, traders are using alternative methods to buy and sell shares as volume dries up on the traditional stock exchanges.

Despite prices ending the year on a high note, with the MSCI Asia ex-Japan index up more than 19%, the moves haven't been led to busy trading. The volume of transactions on exchanges in Hong Kong, Australia, Japan, South Korea and Singapore was down by about 30% in the third quarter from a year before.

The lack of trading on exchanges "has forced the market to think out of the square a little bit," said Emma Quinn, head of Asian-Pacific trading at AllianceBernstein Holding LP in Hong Kong, which managed assets worth $45 billion in Asia, excluding Japan, as of the end of October. "I've never seen it this quiet, and I've been in the market for nearly 15 years."

Subdued trading on the exchanges makes it harder to find buyers or sellers to fill big orders. It also means large transactions are more likely to move the price of the stock. For thinly traded stocks, there may be few orders to sell at the current price, so a trader wishing to buy may have to offer to pay more, making it more expensive and pushing up the price.

In November, the average daily volume of trade in China Mobile Ltd.—one of the largest constituents of Hong Kong's Hang Seng Index—was 15.5 million shares, down from 25.6 million two years ago.

For asset managers who tend to buy or sell shares in large quantities, this poses a particular problem. If a trader wants to sell a big stake in a listed company, it may take several days to complete the order because there will only be so many buy orders for a particular stock in a single session. Plus, the longer it takes to complete the order, the greater the chance that other traders find out about it and seek to profit from the expected price move.

One solution for Asian traders is the growing use of dark pools, which are private electronic-trading venues where investors can trade shares anonymously. By matching up with another party away from the public market, investors are able to reduce the chance of the rest of the market finding out about the trade.

"It was always harder to trade equities in Asia because of the relative lack of depth compared to a more mature market such as Europe, and in a falling liquidity market that just gets magnified," said Lee Porter, Asian-Pacific head of Liquidnet Holdings Inc. in Hong Kong, a firm that manages dark pools in nine markets across Asia.

Dark pools still account for a relatively small amount of trading in Asia. The Securities and Futures Commission in Hong Kong earlier this year put the volume at 1.5% of overall trading, compared with 13% in the U.S.

Liquidnet's average transaction size is $1 million and while volumes have fallen on public markets, more trades are being completed on the company's platform, Liquidnet's Mr. Porter said.

"In the good old days we used to be able to go to the exchange to get all the volume we needed, and now you have to access other sources of liquidity," said Richard Coulstock, head of dealing at Eastspring Investments in Singapore, which has more than $90 billion of assets under management.

Broker ITG, which operates a dark pool in five Asian markets, says its Asian liquidity barometer—which measures volume, volatility and the spread between bid and offer prices—reached its lowest levels since the financial crisis in the second and third quarters of this year.

"With increasingly illiquid markets and wider spreads, we have found that trading blocks in dark pools has helped us to control trading costs, benefiting our clients," Mr. Coulstock said.

Another way to deal with the lack of trading volume has been block trades, in which banks find buyers for a large chunk of shares, often owned by just one investor, outside of the exchange's operating hours. This helps avoid moving the market during daily trading.

The volume of block trading conducted in Asia has more than doubled this year, to $52.7 billion from $23 billion in all of 2011, data from Dealogic show.

In particular, there has been an increase in reverse-inquiry blocks, in which investors asks brokers to approach existing shareholders to see if they might be interested in selling some of their stake.

"Such an arrangement can be mutually beneficial by reducing the market impact each client would have if they'd gone and tried to execute in the market against existing liquidity, because their large orders will have a timing mismatch between the buy and the sell orders," said Kent Rossiter, head of Asian-Pacific trading at Allianz Global Investors in Hong Kong. The firm had assets of €29.7 billion ($39.2 billion) in the Asia-Pacific region as of September.

Corrections & Amplifications AllianceBernstein managed assets worth $45 billion in Asia, excluding Japan, as of the end of October. An earlier version of this article said it managed $45 million.

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